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As Environmental, Social and Governance (ESG) issues move into mainstream investing, your chief financial officer, chief accounting officer, chief risk officer, controller, investor relations officer and other c-suite executives, should seriously consider embracing ESG performance as an important operating set of material factors used to better manage your risk, corporate strategy and long-term opportunities. Investors and diverse stakeholders (e.g. employees, customers, regulators, business partners) now consider a company’s ESG performance as a measurement of management quality and resilience to risk.
A 2017 CFA Institute ESG Survey found, over 73 percent of investors consider ESG indicators in their decision-making processes and the main reason they are doing so is to manage risk. Risk is spread across current credit rating and ESG rankings; these are combined to create ESG quality scores on your current ESG disclosure, or lack thereof, telling your company’s story with often incomplete and inaccurate data.
CFOs, IROs and auditing teams, along with Board Governance and Sustainability teams have a stake in the impact that negative ESG rankings can bring to the credit rating of a company’s offerings. Moody’s investor research report, released in September 2018, depicted an environmental risks global heat map depicting 11 sectors, with $2.2 trillion debt, that have elevated environmental risk exposure, as compared to a Moody’s 2015 study. This global heat map dissects the environmental risk exposure of 84 industry sectors in total, representing $74.6 trillion in related debt (up 10 percent from 2015).
For CFOs, a fundamental first step to understanding which ESG company data is used by ratings firms, is defining a checklist for identifying and creating decision-useful ESG disclosures. The following questions should be addressed:
- Do we know what ratings your company is receiving from ESG specialists, and rating firms, including Moody's and S&P?
- Are we providing the information that rating firms are looking for when they assign “grades” to public companies for their ESG disclosure?
- Have we checked to make sure that the information ESG ratings agencies are using is accurate and complete?
- Have we moved beyond “check-the-box” ESG disclosures, to something that is meaningful for company management, investors and stakeholders?
- Are we including clear metrics, using company identified material facts in our ESG internal and external communications?
- Have we identified which ESG disclosure frameworks can best help give our company investors and other stakeholders the decision-useful information they want and need?
When ESG material facts are measured and managed, sustainability, corporate responsibility or ESG disclosure can easily become a platform for your management team to talk about other facets of a company’s story that may have been historically overlooked. Boards and c-suites are now informed with clearly defined ESG material KPIs, which may be honed for corporate strategy, management goals, addressing short term risk and long term opportunities.
Join Donnelley Financial Solutions and the G&A Institute for our November 6th webinar. Hear from a panel of experts who will:
- Help you examine what ESG data your company is communicating today.
- Explore how this data is being used by ESG ratings agencies and investors.
- Provide insight into how to implement a measurable sustainability plan linked to corporate strategy, long-term value creation and materiality.
Attending the CFRI 2018 event in NYC on Nov 12-13? Stop by the Donnelley Financial Solutions exhibit booth for free copies of our innovative ESG research papers.